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Three Reasons to Buy China Stocks Now

3 Reasons to Buy China Stocks Now.

I admit my bias – I’ve worked with China-sector companies for almost a decade, throughout the period the sector has gone from great enthusiasm to shunning. My belief is that the opportunities in the China sector have recovered, and that the recent pull back in the markets has in fact improved the investment appeal moving forward.

1. Quality has improved.

High profile failures within the China Stock Sector has resulted in the remaining issuers being faced with much higher levels of scrutiny by investors, auditors, and regulators. Prior to 2011, with huge investor demand for China sector exposure, due diligence suffered. Investment banks, brokerages, auditors, and even stock exchanges competed to bring issues to the market to satisfy the demand, and quality suffered.

There will be the occasional scandal, there is in every sector. Generally though the remaining listed issuers have been poked, prodded, investigated, and reviewed to an extent rarely seen among issuers in other sectors. Even more importantly, the central Chinese government has made it clear that they have been embarrassed by the outright scams. They do not want to see their companies blackballed by western exchanges. It is not a wise career move for a Chinese executive to embarrass his country. This will clear a lot of the shenanigans up at the source.

Demand will increase.

In the darkest days of the dotcom crash of 2000, when even mighty Amazon hit the skids following a bearish Lehman Brothers report, it was next to impossible to find interest in internet stocks. Investors retreated to bricks and mortar, and the sector went from favourite child to leper. 135 dotcom stocks went bankrupt in 2000 as funding stopped. Ultimately, though, investors returned. While the internet bubble got ahead of the internet economy earlier last decade, eventually the internet economy got to a point that investors could not ignore any longer.

And investors won’t be able to ignore China sector stocks for too much longer. China’s economy is on route to being the world’s largest economy. Most of the revenue growth amongst the S&P 500 is from overseas (of which a large part is China), and so investors are already participating in Chinese growth. The demand for China “pure plays” will follow. Right now, investors are using the mantra “Nothing China”, but soon this will change.

Supply is shrinking

This often infuriates China-Conspiracy-Theorists, since they are convinced that part of the master plan was to fleece investors and then buy the companies back cheap. The conspiracy theorists don't accept that the reason for going private is the same as for any company - when the valuation isn't there, look for options. Many China-based companies trade below net cash value. More than a dozen companies have announced their intention to privatize. The China Development Bank is providing more than $1 Billion in lending to help companies leave the US stock markets. Meanwhile, new listings are drying up.